OTTAWA — The federal carbon tax could favour coal-fired power plants over clean sources like wind and solar in its approach to industrial emissions, a new report says, potentially undermining a central aim of the Liberal government’s policy.

Environment Minister Catherine McKenna released a regulatory proposal in December 2018 that provided details on the heavy emitters portion of the carbon tax, including how levies would be applied to electricity generators. Independent think-tank The C.D. Howe Institute reviewed the proposal and found it would actually give a leg up to higher-intensity emissions like coal and “diminish” investment in renewables, due to a decision to raise a critical threshold on certain producers.

“This is indisputably a carve-out for coal that departs from the principle of an economy-wide carbon price,” said Grant Bishop, who wrote a report on the institute’s findings published Tuesday.

The report could add weight to claims that the federal carbon tax introduced by Prime Minister Justin Trudeau does little to target high-intensity industrial emissions. It could also have an impact on coal-related emissions in Alberta, which still depends heavily on the fuel source to generate power.

The federal carbon tax applies in provinces that do not have their own emissions reduction policies in place — currently Saskatchewan, Manitoba, Ontario and New Brunswick. Premier-designate Jason Kenney has said he will repeal Alberta’s carbon tax after he takes office, which would mean the federal tax will also apply in that province.

The federal carbon tax is broken into two parts: an economy-wide tax on fuels like gasoline and diesel, and a heavy emitters tax, or output-based pricing system (OBPS), that will be applied to industrial polluters.

In December, McKenna released a regulatory proposal for the OBPS that would force coal-fired facilities to pay levies based on a threshold of 800 tonnes per gigawatt hour (GWh), compared with a threshold of 370 tonnes per GWh for natural gas. That higher target effectively provides more space for coal providers to sidestep levies, giving them a comparative advantage over natural gas or even emissions-free energy sources like hydro, wind and solar.

Minister of Environment and Climate Change Catherine McKenna is seen speaking at Laurentian University in Sudbury, Ont., on March 7, 2019.

“The result of differentiating the benchmark is that a more GHG-intensive coal-fired power plant may pay less for each tonne of GHG emissions than a natural-gas fired power plant,” Bishop wrote in the report.

Ottawa has yet to release its final regulations on the OBPS, though it says it will be applied retroactively as of January 2019. The economy-wide fuel tax, meanwhile, was introduced April 1, 2019.

The economy-wide aspect of the carbon tax has been used by some provincial leaders to attack the federal government, and was a key issue for Kenney’s United Conservative Party in last week’s Alberta election. Ontario and Saskatchewan have already launched lawsuits against the feds on the constitutionality of the carbon tax, which observers expect to reach the Supreme Court of Canada.

“Our plan is designed to ensure that industries competing internationally can continue to remain competitive, while making sure they have incentives to find clean solutions, be more energy efficient and save money,” a spokesperson for McKenna said Tuesday in a written response to questions from the National Post.

Alberta has easily the highest levels of coal-related emissions in Canada, releasing 38.5 million tonnes of greenhouse gas emissions every year, more than half the national total of 57.9 million tonnes. Saskatchewan is next-highest with 12.9 million tonnes.

Despite criticism of the OBPS, some observers say McKenna’s regulatory direction is unlikely to have a major impact on coal-fired emissions in Alberta.

Kenney said last May he would introduce a carbon levy on heavy emitters, similar to the Alberta policy before the NDP — a move that would replace the federal OBPS system.

“One thing I’ve said is we would be comfortable, probably, going back to what we had as a levy — a tax — on major emitters, where the companies that produce the emissions actually paid into a research fund,” Kenney said in response to media questions last year.

Alberta first introduced a carbon levy in 2007 aimed solely at heavy emitters like oilsands facilities, concrete plants and refineries, which was set at $15 per tonne. Unlike the federal system, it applied a constant threshold for emissions across the industry, rather than by fuel source.

Similarly, Saskatchewan has already proposed a levy on heavy emitters that will stand in place of the federal carbon tax. Ontario last year introduced an environmental plan that effectively included a carbon tax on heavy emitters, which could replace the federal plan.

Keith Stewart of Greenpeace expects that even in the unlikely event that the federal OBPS is applied to Alberta, producers are likely to continue their shift toward wind, solar and natural gas-fired power. Utilities have begun investing more in natural gas and renewables in recent years as the province looks to phase out coal by 2030.

“I don’t think TransAlta or anybody else is excited to go back to their coal plants,” Stewart said.

Alberta still generates 45 per cent of electricity from coal, and 45 per cent through natural gas, according to the National Energy Board. Hydro, wind and geothermal make up the other 10 per cent.

Environmentalists have argued that electrical transmission should not be subject to an OBPS because many domestic power suppliers do not operate in a free market, unlike oil companies or refineries, for example.